Forwards vs Futures: Same Promise, Very Different Contracts
JephAi Team · 13 October 2026 · 8 min read
Picture a coffee roaster in March. She knows she will need 20 tonnes of beans in September, and she has no idea what they will cost by then. A bad harvest in Brazil could push the price up sharply. So she calls a trader and agrees, today, the price she will pay for beans delivered in September.
That agreement is a forward contract. If she had done the same thing on an exchange, with a standard contract, it would have been a futures contract.
Both do the same basic job: they fix today the price of a trade that happens later. The differences are in who you deal with, how the contract is settled, and what happens to your cash in the meantime. Those differences are exactly what the CFA and FRM exams like to test.
The one-line difference
A forward is a private agreement between two parties, settled once, at the end.
A futures contract is a standard contract traded on an exchange, settled every single day.
The rest of the differences come from that.
Forwards: a private deal you hold to the end
A forward is negotiated directly, usually between a company and a bank. Because it is private, it can be shaped to fit exactly: any amount, any date, any underlying asset.
Take a US company that will be paid €1 million by a German customer in three months. It worries the euro will weaken before then. So it agrees with its bank to sell €1 million in three months at 1.10 dollars per euro (1.10 is the dollar price of one euro).
Three months later, the company hands over €1 million and receives $1,100,000, whatever the market rate is that day.
- If the euro has fallen to 1.05, the euros would only have been worth $1,050,000. The forward saved the company $50,000.
- If the euro has risen to 1.15, the euros would have been worth $1,150,000. The forward cost the company $50,000 of upside.
That's the trade-off with any hedge: you give up the good outcome to get rid of the bad one, and you are left with a known number.
Usually no money changes hands when a forward is agreed. The price of that convenience is counterparty risk: if the other side cannot pay at the end, you are exposed. A forward is also hard to get out of early. There is no screen where you can sell it; you have to negotiate with the same bank or agree a second forward that offsets the first.
Futures: standard contracts, settled every day
Futures trade on exchanges such as CME and ICE. Every contract has the same size, the same delivery months and the same rules. You cannot ask for 20.3 tonnes delivered on 17 September; you take the nearest standard size and month.
In return you get three things a forward does not give you:
1. A clearing house in the middle. It becomes the buyer to every seller and the seller to every buyer, so you no longer depend on whoever took the other side of your trade.
2. An easy exit. You can close your position on any trading day by doing the opposite trade. Most futures positions are closed this way long before expiry; very few end in delivery.
3. Daily settlement, also called marking to market.
The third one is where candidates lose marks, so let's do it with numbers.
How daily settlement works, with numbers
You buy one futures contract at a price of 2,000. The contract covers 100 units. The exchange asks for two amounts:
- Initial margin: $10,000, deposited when you open the position.
- Maintenance margin: $8,000. If your balance drops below this, you get a margin call.
The numbers are made up to keep the arithmetic clean. Every evening the exchange's clearing house compares the day's settlement price with the day before, and moves the gain or loss into or out of your account.
| Day | Settlement price | Gain or loss | Account balance | What happens |
|---|---|---|---|---|
| Start | 2,000 | – | $10,000 | You post the initial margin |
| 1 | 1,980 | −$2,000 | $8,000 | At the maintenance level, no call yet |
| 2 | 1,970 | −$1,000 | $7,000 | Below maintenance: margin call |
| 2 (after top-up) | – | – | $10,000 | You deposit $3,000 |
| 3 | 2,010 | +$4,000 | $14,000 | You can withdraw $4,000 |
Two things to notice.
The margin call on day 2 is $3,000, not $1,000. Once your balance drops below the maintenance margin, you top it up all the way back to the initial margin, not just back to the minimum. This is the most common margin mistake on the exam.
Add up the daily gains and losses: −$2,000 − $1,000 + $4,000 = +$1,000. That is exactly (2,010 − 2,000) × 100. Your total profit is the same as it would have been on a forward at the same price, ignoring interest on the daily cash flows. What changes is when the cash moves: a little every day, instead of all at the end.
This is also why a futures position is worth zero again each evening, once the day's gain or loss has been paid. A forward is different: its value builds up, positive or negative, until the day it settles.
Try it yourself
Change the two margins, or try a new price path, and watch when a margin call comes and how much it takes to top the account back up.
Your margin account, day by day
One contract on 100 units, bought at 2,000. A call is triggered when the balance falls below the maintenance margin, and tops it back up to the initial margin. The first three days are the example from the article.
Side by side
| What differs | Forward | Futures |
|---|---|---|
| Where it trades | Privately, over the counter | On an exchange |
| Terms | Tailored: any amount, any date | Standard sizes and dates |
| Settlement | Once, at the end | Every day |
| Counterparty risk | Yes, on the other party | Very small: the clearing house stands in the middle |
| Cash at the start | Usually none | Initial margin |
| Getting out early | Hard: negotiate or offset | Easy: do the opposite trade |
| Typical users | Companies hedging an exact amount and date | Traders, funds, and hedgers who want liquidity and an easy exit |
Do forwards and futures have the same price?
Almost. For an asset that pays no income and costs nothing to hold, the forward price is simply today's price grown at the risk-free rate:
With a spot price of 100, a risk-free rate of 5% a year and one year to go, the forward price is 105. FRM questions, following Hull, usually use continuous compounding instead, , which gives 105.13 here. If the asset pays income along the way, such as dividends or coupons, the forward price is lower. If it costs money to hold, like storing wheat or oil, it is higher.
Futures prices follow the same logic. The daily settlement only creates a difference when interest rates move in step with the futures price. If futures prices tend to rise when rates rise, the holder of a long futures position receives cash just when it can be reinvested at higher rates, so the futures price ends up slightly above the forward price (and slightly below it if they tend to move in opposite directions). If rates never changed, or moved independently of the futures price, the two prices would be the same. For most exam questions you can treat them as equal; just know where the small difference comes from.
Where they show up on the exams
- CFA Level I (Derivatives, 5–8%): how forwards and futures differ, margin and marking to market, pricing with the formula above, and the difference between price and value.
- CFA Level II: valuing forwards on stocks, bonds and currencies after they have started.
- FRM Part I (Financial Markets and Products, 30%): futures mechanics and margin calls, hedging with futures, basis risk, and the minimum variance hedge ratio.
The three mistakes that cost marks
1. Topping up only to the maintenance margin. After a margin call you go back to the initial margin.
2. Mixing up price and value. The forward price is the price written in the contract. The value starts at zero and then changes with the underlying price, interest rates and the time left to expiry.
3. Assuming a futures hedge removes all risk. If the contract is not on exactly what you hold, or does not expire on your date, the hedge is imperfect. That gap is called basis risk.
Back to the coffee roaster
She chose a forward, and for her it was the right call: an exact amount, an exact date, and no daily margin calls to manage. A trading desk betting on the price of coffee would choose futures, for the opposite reasons.
Related reading: a swap is a string of forwards, explained in Interest Rate Swaps Explained. For contracts whose value doesn't move one for one with the price, see The Option Greeks.
Want to check you have it? The derivatives questions in the JephAi Questions Bank cover margin calls, forward pricing and price versus value, each with a worked explanation.
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